Urbaneer’s Winter 2018/2019 Toronto Real Estate Forecast: Part One

What is to come in 2019? To formulate the answer to this complex question, I'm going explore the influences that are shaping the Toronto real estate market - particularly the ones gathering speed. In Part One of this forecast, I’ll interpret what the pundits are predicting for the coming year, and examine how a shift in demographics and buyer behaviour is affecting real estate. I’ll also discuss the current balance (or lack thereof) of housing supply and demand, and the growing outcry on the need for government to address creating housing options for the "missing middle" in urban centres (and in particular in Toronto and Vancouver).

The Pundits

For years now, the hot Toronto real estate market has been the focus of headlines and alarm bells, with records being broken, prices testing the bounds of affordability and fear of a real-estate bubble bursting. While the bubble hasn’t “burst” in a technical sense, the market has seen some measure of pull-back, mostly in reaction to various measures, including policy like the Fair Housing Plan, increased mortgage stress test and several hikes in interest rates. It is interesting to note that when similar pressures are applied to the market, sales decline. Fact. It's not limited to Vancouver and Toronto, but has happened in a number of frothy international markets, as outlined in this article "Comment: Metro Vancouver just one city in global real estate slowdown".

So what can we expect to see next year? That depends on who you ask, of course. There are those who think that the moderation that we’ve experienced in the market is going to continue into the foreseeable future, with potentially even greater declines on a national level. However, most agree that Toronto specifically will see some price increases over the coming year, but many vary with their points of view of how much of an increase will occur and why. A recent Reuters poll of analysts featured in this article: “Cooling Of Canada’s Real-Estate Market Expected To Continue: Poll” showed that analysts believe that the Canadian market will cool further on a national level, mostly due to tougher mortgage regulations and higher interest rates. They do feel regionally Toronto will see a slightly larger increase (3 per cent instead of 2 per cent) than previously predicted. They attribute this mostly to the ongoing pent-up demand for the limited supply of housing. It is important to note that, although yes - this marks an increase, it is a far cry from the high and heady increases that have characterized the market in years past.

There are a number of analysts who feel that the policy maker’s efforts have finally taken root in the market and that there is an expected “prolong period of calm” in the real estate market. Click here to read “From Stagnation To Slim Gains: Canadian Housing Markets In 2019”. On a national level, CMHC expects both housing sales and starts to pull back next year and beyond, mostly due to economic factors that be softer than in years prior: “CMHC Says Housing Market Will Moderate For Next Two Years As Sales And Prices Decline”. As that article touches on, there will likely be a cooling in demand for low-rise housing. This isn’t because low-rise housing will fall out of favour; rather there is a lack of new supply; given the scarcity of land and affordability issues. As a result, developers are focusing more on higher-density, high-rise housing.

Reality Check For Homebuyers

While I've always subscribed to the buy-and-hold proposition for any real estate purchase (the only time you lose money in real estate is if you have to sell, or you choose to), as the market has stalled or stagnated in the suburbs, it's dawning on many Buyers that locking down any piece of Toronto real estate no longer assures 'easy asset growth'. For years homebuyers who believed that purchasing a home = a quick vast appreciation of wealth are recognizing they'll have to adjust their expectations and their timelines as price gains slow. Just like homebuyers have been given a false sense of “affordability” because of an extended period of ultra-low interest rates, they have also been given a false sense of the timeline for return on investment (Click here for my realistic advice on how to navigate the property ladder in Dear Urbaneer: How Much Profit Should I Expect Climbing The Property Ladder?).

Will The New Market Reality Temper FOMO?

When you consider the many influences around real estate, some are economically based, but many are rooted in something less academic. Don’t underestimate the power of emotion, bidding wars and the fear of missing out to drive prices astronomically high in past years. However, the landscape has shifted.

This article “In The Suburbs Surrounding Toronto, Things Get Real” discusses how 2017 gave homebuyers a hint of what was to come in terms of market moderation, whereas 2018 saw it actually unfold. The belief is that for 2019, this new sense of reality in the market may temper expectations of both buyers and sellers. Buyers may be more reluctant to load on debt and pay any price for homes; similarly, serious Sellers will be more inclined to price their homes based on current market prices and not in line with the double digits increases in the past. When the middle ground between Buyer and Seller is laid on more even ground, you get that balance in the market.

Those of us in the real estate trenches began to see some hesitation on the part of Buyers this Autumn. It's not that they don't want to buy, but they're recognizing they need to be highly selective in choosing a property which is going to remain coveted, whether that be for its location, space plan, sightlines, unique features, or on-trend design. The next little while will be all about cautionary purchases, especially in the condominium market, which is more susceptible to market shifts given the housing form is predominantly geared to buyer profiles where cost and affordability are critical factors, and its supply is not constrained like the freehold property market, in particular in the central core. If you're a condominium Buyer, take your time finding the right place for you, and be highly discerning. If you're a Buyer seeking a house in the central core, be prudent but recognize move-in product under $1.3mil is going to continue being in demand.

While it seems that the pervasive sentiment is that prices will continue to moderate, there are a number of factors that will support growth. Ideally, if the policy measures continue to add some control to the market, and these economic factors continue to position the market for growth, you end up in balance, which helps with affordability (in theory), lower debt levels and growing wealth at a more reasonable (albeit long-term) rate.

What Will Keep Prices Growing?

On a micro level, what positions a real estate acquisition for growth is that tried and true mantra: location, location, location. Proximity to amenities, green space, schools and public transport will help to ensure the long-term growth of your home. Here's my tried and true Dear Urbaneer - On Choosing A Winning Location. However, on a larger scale, there are certain economic fundamentals that will position the overall market for growth, namely the flow of demand. Both demographics and employment play a role. There is a healthy wave of millennials seeking to enter the market and who continue to prize home ownership, helped along by the Bank of Mom and Dad, which I’ve written about a number of times. This transfer of wealth will continue to support market growth, as I wrote in How The Bank Of Mom And Dad Is Stabilizing Canadian Real Estate Prices and Is The Bank of Mom and Dad Behind Rising Housing Prices?

Growing employment in Toronto continues to be a major story. In fact, Toronto is poised for a “tech boom”. Over the last five years, Toronto has added the most tech jobs of any North American city. The job growth is so substantial, that many feel that the current market moderation will be a “speed bump” in growth. Click here to read “Toronto’s Tech Boom Will Keep Real Estate Frenzy Going: Forecast.” With major capital investment from brands like Microsoft, Uber, Shopify, Airbnb, and Google Sidewalk Labs, there will be an influx of workers with buying power. This article : “Toronto Real Estate Readies For Another Boom” suggests that the central downtown condominium market will see values rise in response; given this will be where most of this new employment is centred.

A Snapshot Of The Market: Reflecting On Changes In Buyer Demographics

In a tumultuous market where housing prices outpace incomes and the cost of living continues to grow, the profile and activity of buyers and sellers tend to shift to reflect the trends. The First-Time homebuyer demographic traditionally holds a great deal of power in shaping the market. In our current generation most First-Timers are Millennials, who carry a great deal of demographic weight, generally speaking. They are large in numbers and continue overwhelmingly to seek the dream of homeownership.

According to this report from OREA, 700,000 Millennials will be looking to buy homes in the GTA over the next decade.

This CIBC poll shows that 94 per cent of Millennials who are currently renting or living with family intend to buy a home.

No question, the dream of home ownership continues to burn brightly for this cohort, despite prohibitively high costs and other barriers to chasing that dream. Click here to read my post about all the costs of homeownership, beyond the purchase price (which admittedly in Toronto, is substantial to begin with) Why Does Homeownership Remain A Priority For Canadians, Despite The High Costs?As I touch on in this blog, Canadians outpace the rest of the world in terms of owning their own homes, driven in part by the ability to grow wealth, but also because of strong social and emotional influence as well. As the challenges in the market increase, so does the climate for these hopeful homebuyers, as is pointed out in this article “Millennials And Housing: ‘The Kettle Is Close To Boiling’”

Millennials are feeling frustrated because of their inability to either get in to or move up the property ladder, due to high housing prices. They are also feeling stressed (both mentally and financially) by the extra debt that they have had to take out early in their lives just to afford housing. Click here to read “Haunted By Housing: Millennials Let Rip About Their Home Ownership Frustrations”. The fundamental approach to responsible home ownership has admittedly had to change for this generation. No longer can you set a budget, save money, put a down payment on a home and gradually climb the property ladder; high housing prices that take a crippling bite out of household income, lack of stock and wild competition amongst buyers means that there is a “now or never” mentality for Millennial homebuyers.

Creating an even greater generational divide is the fact that the two generational bookends, the Millennials and Baby Boomers are now competing for properties, as one group vies for entry-level properties and the other looks to downsize. The problem is that both of these stops on the property ladder are ultimately in the same pool of stock, which is limited (and pricey) to begin with. Boomers have had a lifetime to accumulate wealth and tap into the equity that they’ve accumulated, which gives them a decided edge over the Millennials, who need to heavily leverage themselves with debt. This only fuels the generational resentment. There is a pervasive sense from Millennials that not only have previous generations had an unfair advantage to pursue the home ownership dream (although they dealt with double digit interest rates, which I will explore in Part Two of the forecast). There is also the sentiment that the government isn’t doing enough to assist this generation to get into the market.

What we risk is an entire generation either being shut out of homeownership, or being heavily laden with a debt that will likely follow them through their lives, in opposition to what previous generations have done. The end result is a financial vulnerability for those who secure home ownership and a re-definition of all of the socio-economic factors that compel home ownership, status, wealth and self-identification. Click here to read my insights on how housing fulfills needs beyond shelter in Maslow’s Hierarchy Of Needs And Toronto Real Estate For Buyers and Maslow’s Hierarchy Of Needs And Toronto Real Estate For Sellers. Here is an interesting article that validates the Millennial concerns about housing challenges: “Canada Has a Broken Housing System and It Has Fucked Over Millennials”. As if rising housing prices weren’t enough for Millennials to deal with, rising interest rates may effectively shut them out of the market altogether, which I’ll visit again in Part Two of the forecast.

The Rise Of Multi-Generational Housing & Aging In Place Co-Housing

Given the constraints of supply, along with eroding affordability, there has been a definite uptick in multi-generational housing purchases. This not only helps with the transfer of wealth and helps to ease affordability challenges, living in a multi-generational environment is helpful to all generations; parents benefit from childcare from older parents, cutting those high costs; aging parents benefit from having onsite care from adult children; the entire family unit benefits from the strong family ties that are fostered when your lives are intertwined with extended family.

The most recent Census shows that there has been an increase of 37.5 per cent in multigenerational housing in Canada since 2001, with the highest proportion happening in Toronto and Vancouver (17 and 16 per cent respectively) where real estate is most expensive, not surprisingly. This no doubt influences the market because of specific housing stock requirements to house multi-generational housing. Watch for the rise of the multi-generational family who are buying the large vintage 3 storey dwellings for their own occupancy of three generations. They have wealth, and they want central locations near shopping schools, health care, green space, bike lanes, cafes and recreation centres. Want to see an example? I recently sold this Heart-Grabbing Edwardian On Markham Street for over $2mil when 8 sets of Buyers competed for it. All of the buyers were families, and half of them were multi-generational.

Another segment of Buyers to watch for - given the intensity of their discussions I'm hearing at social functions - are the maturing Baby Boomers. They're considering collectively cohabitating so they can age in place with their 'chosen family' and bypass the need to go into expensive long term care facilities. Instead, groups of individuals and couples will pool their financial resources and purchase properties in the city, ideally on the larger city lots (perhaps dwellings which are near obsolete and therefore sold mostly for land value) that can be transformed into co-housing residences. While it's not unusual for retirees to initially head to more remote locations outside the city to embrace a quieter and more economical life amidst nature, there inevitably comes a time where being in an urban centre is necessary. Proximity to health care specialists, access to public transportation (or uber), and being able to walk to daily amenities like pharmacies and grocers becomes really important as your mobility decreases. And engaging consistently with a community becomes increasingly important - whether it be participating in cultural events, social clubs, or fitness groups. As one ages, isolation no longer is your ally. It becomes critical to cultivate being mentally, emotionally, and physically in top form, or at least having a support network who can both nurture your well-being while taking care of you.

Think a la Golden Girls. The solution? The right sized city lot can accommodate a 3000 to 4000 square foot 4 floor dwelling (of which 25% is partially below grade to comply with planning regulations) containing four to six suites of around 400 to 600 square feet each having a sitting room with beverage bar (toaster oven, bar sink and fridge), accessible spa washroom and sleeping sanctuary plus balcony - all which share the ground floor domestic space containing a communal kitchen, dining and lounging zones. These mini estates - either newly constructed or substantial renovations/expansions of existing housing stock - will become 'group households' comprising singles and/or couples with space potentially accommodating a live-in caretaker. These properties will be kitted out with all the latest gadgetry like elevators, voice-activated communication systems and defibrillators, embrace sustainable materials and design programmes, and be custom tailored to suit. As our health care system becomes overwhelmed the affluent will find it to their advantage to band together in multi-unit homes that they collectively operate in a holistic self care manner.

Hopefully this kind of collective housing form will be embraced and encouraged by policy makers, and lenders, such that it might be accessible to a broader population, including those who might require financing. Right now, financing options are limited for those exploring co-housing, as I recently explored in Dear Urbaneer: Can I Sell Part Of My House For Co-Ownership?

The multi-generational family, and aging-in-place cohousing comrades, will both be keen to reinvent our centrally located single family housing stock. This demographic cohort of Torontonians - many who are part of the greatest transference of generational wealth Canada has ever witnessed - will funnel it into supporting each other, their families through shelter. As equally critical, and in fact more common, is the increase in condominium purchases by middle class residents, buying for their children to use during post-secondary education which they, themselves may occupy in retirement as a pied-a-terre.

Who’s Buying What And Where: My View From The Real Estate Trenches

Being aware of the market influences, it is interesting to see how this is actually unfolding in the Toronto real estate trenches and witness how “who” is buying “what” now in Toronto. Here's a snapshot of what I’ve been seeing. There has been a shift in the tide of offers being submitted, including who are submitting them, depending of course on location and the product for sale.

Toronto has always been a draw for immigrants because of its many amenities and its richly diverse multi-cultural mix of neighbourhoods. In midtown, the Asian community remain keen on single family dwellings. They’re buying both for proximity to work, and to have their children integrate and assimilate. In the central west and east part of the central city, it's first and second generation Canadian kids whose parents or grandparents immigrated to Canada that are snapping up properties. These Buyers hail from all over the globe, including Great Britain, Europe, India, Persians, Jews and Asians. By and large, this wave is highly educated, affluent and most have some help from family (i.e. the Bank of Mom and Dad). Homes on the periphery of the triple AAA locations - like the Leslieville, the Upper Beaches, Danforth Main on the East, Brockton Village, Wallace Emerson and the Junction are being targeted by flippers. The flippers are picking up anything that needs a fair chunk of work. Most buyers don't have the capital to buy a house that requires 250k in renovation. They'd rather buy the 1.2mil reno'd house than one that's 900k that needs a year of work. They're simply too busy and don't have a comprehensive understanding of what's required. The flippers, however, have the capital and the intent to reno and resale. It's their business (and hopefully they're doing it with pride). Here's a snapshot from the trenches in How Toronto Real Estate Near Queen Street – East & West – Is Climbing In Value.

As always, the question of supply and demand in Toronto real estate is a major driver in housing prices. I’ve touched a fair bit on the gap between supply and demand in the detached market and, more recently with condominiums (which I will get into more detail with in Part Two of the forecast). But what is emerging in the supply/demand debate is a missing part of the housing equation: namely the “missing middle”, which impacts overall market supply and affordability. Basically, we’ve got loads of high-density condos and low-density houses but there's no place for mid-density housing like townhouses etc. As a result, there's a shortage of housing types - called the missing middle - which can accommodate families etc.

This article from the Globe and Mail: “Townhouses Remain A Big Missing Piece In Toronto’s Affordability Puzzle” talks about how townhouses, a good housing choice for homebuyers across the country who need a little more space than a condominium might provide, but can’t afford a detached home, are widely unavailable in Toronto. In fact, according to stats quoted in this story, townhomes actually accounted for 18 per cent of all starts and 38 per cent of single-family starts in 2017, but are on a steady downhill slide in sales. And according to this report, “What Is The Missing Middle? A Toronto Housing Challenge Demystified”, townhomes are the way of the future, due to lack of available land and sky-high prices for detached homes. However, there has been a definitive lack of new development in Toronto, despite the expressed need and the demographic support to feed the demand.

To date, developers have focused most of building high-rise condos. Land is expensive, but development costs are exorbitant, which means that developers are leaning towards building multi-unit buildings as opposed to low-rise homes in an effort to garner the highest profit. Click here to read my post called Will A Lack Of Supply Fuel The Toronto Housing Market? which talks about development costs and other factors impacting supply. Certainly affordability and suitability are the key factors in their desirability, with many families living in condos finding that their housing isn’t big enough or configured properly to accommodate their families. Similarly, incomes lag behind housing price growth, placing the chance of buying a freehold property out of reach for many.

This does impact the supply greatly. Housing prices have outpaced incomes, which is preventing people from entering the property market. This in turn is keeping more people in their rental housing which is exacerbates the shortage. The lack of supply of rental housing has meant investor-driven condos are serving this market segment. This particular supply/demand dynamic is a function of the government's lack of commitment to ensuring housing is a right rather than a privilege and our system of Rent Control falling short. This limits the return on investment - making less attractive for capitalists vs. other investments. As housing prices continue to become more and more expensive, the number of people renting will increase, which will put increasing strain on this supply.

This article, “Little Relief In Sight For Toronto-Area Home Buyers Looking For A Break” talks about how continued affordability challenges for homeownership place extra pressure on rental supply, despite extra supply that will be hitting the market in the coming year. Furthermore, what is clear is that there is an ongoing lack of rental housing initiatives, which has been going on nearly as long as the condo boom and this, in addition to lack of available stock because of high housing prices has actually helped fuel housing prices even higher. The competition between end users and investors has helped drive prices up as they've pursued the same supply of product. With end users by and large willing to pay a premium for the right to own (I touch on this and other influences in this piece 7 Reasons Why Toronto Real Estate Prices Have Skyrocketed Over The Past Decade), their real costs set the bar for determining what a similar unit “should “rent for. Furthermore, their purchase for personal use effectively reduces the supply side which, in turn, makes tenants more competitive and willing to pay a premium. As tenants pay more to rent a space, it helps bolster the resale value, which contributes to the escalation in values and so on.

How This Impacts Freehold Housing

In the original City of Toronto, I'm confident freehold houses will continue to rise in value for a number of reasons, one of them being that as more high-density development surrounds this low density housing stock they become more coveted, as the convenience of their location increases. We're already seeing that centrally located houses are escalating in value because of the price consumers increasingly put on day to day quality of life - like commute times. As our transportation systems get upgraded or expanded (Eglington, Go Stations, the Relief Line) impacted neighbourhoods will see their values skyrocket. Have you read my post on The Real Financial, Emotional And Health Costs Of Commuting?

Did you hear how "Minneapolis Confronted Its History of Housing Segregation" by repealing all of its single-family zoning and replacing it with as-of-right three unit dwellings in its place this past month? While preserving the existing criteria in terms of maximum size, minimum setbacks and building envelope guidelines for development, by allowing more units this zoning change enables the city to combat high rents by inviting more mixed housing (including the opportunity to accommodate the 'missing middle'), reduce commute times by increasing density, and combat the long-standing racism that exclusionary single family zoning geared to the affluent fostered. And kudos to "Edmonton For Just Launching A 'Missing Middle' Infill Design Competition" for some city-owned sites!

If Toronto doesn't address accommodating our missing middle - low density neighbourhoods will skyrocket in value as the affluent compete for the scarcity of product (which is diminishing fast as a proportionate share of all housing types). Alternatively, if the city finally recognizes it needs to ramp up the provision of housing in this 'missing middle segment' by changing the zoning/density provisions of existing neighbourhoods to add multi-units dwellings likie Minneapolis has (instead of one laneway suite, for example, that allow an existing single family site to be intensified to low-density triplexes or fourplexes), then an intensification policy will also result in an escalation in land value, as more units means more income can be generated which will increase property values. This recent article in Building Magazine - focusing on Toronto's plight called 'Zoned Out' - offers an excellent intelligent analysis of how our existing land zoning policy hinders the growth and vibrancy any city needs.

Either way, the freehold housing market in the original City of Toronto is going to be solid return on investment for those embracing the long term buy and hold strategy. The strategic buyer embracing this belief should look for properties in proximity or within places where rezoning is most likely. Take for example 2 and 3 storey commercial/residential storefronts on main streets (like the Danforth) that will be targeted for land assembly for mid-rise condos. ** In fact, if you're looking for a turn-key property that will serve your shelter needs for the next 20 years and then be well-positioned as a condo assembly site, then check out this Live/Work Brownstone On The Danforth Offered For $1,189,000**. Also a good bet are houses on residential side streets that abut the commercial and residential sites on main streets or a few doors up. If not for the mid-rise condo on the main street, they'll be where the 'missing middle' housing types will be approved. Also, I'm a huge fan of the city house on a corner lot, as there will come a day in our not too distant future where these will be able to be redeveloped into town house sites, with front doors facing both streets making severance and scale easier.

Skip right to Part Two of Urbaneer's Winter Forecast, where I look at the increasingly influential role of interest rates, strategies for climbing the property ladder in a declining market, and the trajectory of the condominium market!